. Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $2 and its current price is $80. a. what is norminal annual rate ofreturn? b. What is its effective annual rate of return?

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3.78K viewsJanuary 10, 2017

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Darshita 6.14K January 10, 2017 0 Comments

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score 0 · Answer 1 · 2017-01-10T04:14:06+00:00

The preferred stock pays $8 annually in dividends. Therefore, its nominal rate of return would be:

Nominal rate of return = $8/$80 = 10%.

Or alternatively, you could determine the security’s periodic return and multiply by 4.

Periodic rate of return = $2/$80 = 2.5%.

Nominal rate of return = 2.5% ´ 4 = 10%.

EAR = (1 + rNOM/4)4 – 1

= (1 + 0.10/4)4 – 1

= 0.103813 = 10.3813%.

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